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Corporate Liquidation-Discussion Guide
Accountancy (Mariano Marcos State University)
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Corporate Liquidation
Liquidation: Termination of business operations. It is a process by which:
1. The assets of the business are converted into cash
2. The liabilities of the business are settled
3. Any remaining amount is distributed to Owners
Common Cause of Corporate Liquidation
- Insolvency
Accounting and Reporting for Liquidation
- Quitting Concern rather than Going Concern
-
Statement of Affairs: a statement which shows the liquidation value of the
corporation.
a. Assets are measured at net realizable values and classified on
the basis of availability
b. Liabilities are measured at settlement value and classified on
the basis of priority
Asset:
1. Assets pledged to fully secured creditors
2. Assets pledged to partially secured creditors
3. Free assets
Liability:
1. Fully secured creditors
2. Partially secured creditors
3. Unsecured creditors with priority
4. Unsecured creditors without priority
Frequently Asked Questions
1. Percentage of recovery for unsecured creditors
2. Estimated deficiency to unsecured creditors
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B Company has decided to seek liquidation after facing financial setbacks. The
company’s statement of financial position on this date is as follows:
Assets
Cash
100,000
Accounts Receivable
300,000
Inventory
450,000
Prepaid Expenses
10,000
Equipment-net
750,000
Land
1,500,000
Total Assets
3,110,000
Liabilities
Accounts Payable
Notes Payable
Bonds Payable
Total Liabilities
350,000
700,000
1,500,000
2,550,000
Shareholder's Equity
Ordinary Share Capital
450,000
Ordinary share Premium
500,000
Retained Earnings
(390,000)
Total Shareholder's Equity
560,000
Additional Information:
1. The assets had the following net realizable values:
Accounts Receivable
120,000
Inventory
300,000
Equipment
400,000
Land
1,750,000
2. The inventories are used as collateral for the notes while the land is used as
collateral for the bonds. Interest accrued on the notes amounts to 150,000 while
the interest accrued on the bonds is 200,000.
3. Unrecorded claims against the company are as follows:
o Accrued salaries of 50,000
o Accrued taxes of 40,000
Determine the following:
1. Estimated recovery percentage for unsecured creditors
2. Estimated deficiency to unsecured creditors
3. How much would the creditor holding the notes payable receive upon settlement?
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